74 Asia Pacific Tax Notes

Sri LankaSri Lanka Budget for the year 2015 was presented in Parliament on 24 October 2014. Thereafter, the presidential election was held in January 2015, leading to a regime change. The new government also presented an Interim Budget on 29 January 2015. A synopsis of the main measures introduced in the two Budgets is set out below.

Income tax

Exemptions• Profits and income arising or accruing to any unit trust from investments

– made on or after 1 January 2015, and

– in US Dollar deposits or US Dollar denominated securities listed in any foreign Stock Exchange

• Profits and income arising or accruing to any company, partnership or body of persons outside Sri Lanka from any payment made by way of royalty as a specific requirement of any information technology (IT)/ business process outsourcing (BPO) company in Sri Lanka for a period of two years from the commencement of the IT/ BPO company

• Interest or discount accruing or arising to any person from any investment

– made on or after 1 January 2015, and

– in any corporate debt security issued by the Urban Development Authority

• Dividend or deemed dividend tax exemption for a period of five years from the commencement of commercial operations of any new undertaking with an investment of not less than USD2 million, where such undertaking is engaged in manufacture of products for export

• Profits arising from construction activities carried out overseas by local construction companies

• Interest on national development bonds carrying a fixed interest rate of 4.5%

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Concessionary tax rates

Rate

• Profits and income of any local manufacturer who

– commenced the business of manufacturing during 1970’s, and

– sustained competitiveness with imports from the sale of such manufactured products in the local market

10% reduction of income tax payable

• Employment income under pay-as-you-earn (PAYE) tax scheme 16% (maximum)

• Profits and income of the local sugar industry 12%

• Profits and income from the production of films or dramas of any individual who produces an award winning film or a drama at an international film/ drama festival

50% reduction of income tax payable for 5 years

• Profits and income of an existing enterprise which

– is liable for income tax at the rate of 28%

– carrying on a business of manufacture of products (other than liquor or tobacco), and

– expands in any province other than the Western Province by investing not less than LKR300 million on or after 1 April 2015 but prior to 1 April 2017 by the acquisition of any fixed asset on which depreciation allowance is claimable within the provisions of Section 25 of the Inland Revenue Act

½ of the applicable tax up to LKR500 million for 5 years

• Any company which registers with the Inland Revenue Department for tax purposes on or before 31 December 2015 with a committed investment in excess of LKR500 million to be made in any manufacturing business (other than liquor or tobacco) within a specified period as approved by the Commissioner General of Inland Revenue

½ of the applicable tax rate for 7 years

• Profits from intercropping activities in the agriculture sector 50% reduction of applicable rates

• Profits of newly commenced businesses in vegetable and food processing 50% reduction of applicable rates

• Profits earned in new projects set up in lagging regions to be identified by Commissioner General of Inland Revenue

50% reduction of applicable rates

The annual turnover limit of specified undertakings qualifying for the concessionary rate of 12% has been increased from LKR500 million to LKR750 million.

Withholding tax on interest

Senior citizens

Interest income accruing for or arising to any senior citizen are exempt from income tax effective from 1 April 2015. Therefore, no withholding tax is applicable (Previously, an exemption up to LKR500,000 was available only for deposits maintained in the state banks.).

Single withholding tax rate

The withholding tax rates of 2.5% and 8% applicable to individuals (other than senior citizens) and charitable institutions have been revised to a single rate of 2.5%, irrespective of the amount of interest.

PAYE tax threshold

Threshold for charge of PAYE tax on employment income has been increased from LKR600,000 to LKR750,000.

Triple deduction of expenses in computing profits

A triple deduction has been granted in computing profits for tax purposes on expenditure incurred on standard skills development training provided to trainees by any person who has registered with the Tertiary Vocational Education Commission.

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Value added tax (VAT)

Reduction of tax rate

The VAT rate has been reduced from 12% to 11%. Accordingly, effective from 1 January 2015, VAT consists of only two rate bands – 0% and 11%.

Category Rate Items

Zero rate 0% Applies to exports, specified international services, services provided to overseas buyers by garment buying houses registered under the Simplified Value Added Tax (S VAT) Scheme by the Commissioner General of Inland Revenue

Standard rate

11% from 1 January 2015

Items other than exempt or excluded supplies

VAT on wholesale and retail trade

The present threshold of the value of supplies for a consecutive period of three months of any calendar year of any person or partnership carrying on a business of wholesale or retail trade for the chargeability to VAT have been reduced from LKR250 million to LKR100 million. Accordingly, the value of supply of goods from a wholesale or retail trade activity is subject to VAT, where the value of goods supplied, including exempt or excluded supplies, in any consecutive three months period is LKR100 million or more.

Registration threshold

Threshold of liable supplies for the registration for VAT purpose has been increased from LKR12 million per annum to LKR15 million per annum.

Accordingly, every person (individual, company, partnership, joint venture, club association, government institution, local government institution, provincial council etc.) must register for VAT if the value of total taxable supplies from his/its taxable activities –

• exceeds LKR3.75 million for any taxable period (one month or quarter),

Tax measures announced in the Interim Budget for 2015

• exceeds LKR15 million for any twelve-month period, or

• is likely to exceed LKR3.75 million in the succeeding one-month or three-month taxable period or LKR15 million in the succeeding twelve-month taxable period.

Nation building tax (NBT)Registration threshold for NBT has been increased from the liable turnover of LKR3 million per quarter to LKR3.75 million per quarter.

Interim Budget for 2015 – tax measures

Super gain tax

A tax at 25%, a one-off charge has been imposed on any individual or company, who or which has earned profits over LKR2,000 million in the tax year 2013/2014.

Mansion tax

A tax of LKR1 million has been levied annually on the owner of every house valued at LKR150 million or more, or of which the floor area is 10,000 square feet or more.

Migration tax

A Sri Lankan migrating to a foreign country is liable to a tax of 20% on all foreign exchange released and to be taken out of the country.

Special levy on casino industry

A special levy of LRK1,000 million has been imposed on casino operators.

Levy on licensed mobile telephone operators

A one-off levy of LKR250 million has been imposed on all licensed mobile telephone operators.

Levy on liquor sales outlets

A one-off levy of LKR250,000 is to be paid by each tavern or liquor sales outlet.

Super gain tax

25%2013/14 profits > LKR2,000 million

Migration tax

20%

Mansion tax

LRK1millionvalue ≥ LKR150 million, or floor area ≥ 10,000 sq.feet

Casino special levy

LRK1,000millionMobile telephone operator levy

LRK 250million

Liquor sales outlet levy

LRK 250,000